U.S.-Backed Mortgages Put to Test in an Innovative Lawsuit

Basic Legal Equality, a legal aid group, has helped file an innovative suit alleging a bank took the federal government mortgage guarantee but failed to take required steps to work with a borrower in default.
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(NATIONAL, Ohio)

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Not engaging with borrowers who have missed payments may not seem like the strongest grounds for litigation against a bank. Yet that is the basis for an innovative lawsuit against U.S. Bank, a division of U.S. Bancorp, one of the largest banks in the country. The legal action could mean fresh legal problems for other big mortgage banks, as well. It is the latest threat to emerge from a barrage of cases that have forced big banks to pay tens of billions of dollars in recent months.

The lawsuit is being brought by Advocates for Basic Legal Equality, a legal aid group. In a twist, the group is suing U.S. Bank in federal court in Ohio on behalf of the United States government, using the False Claims Act. This legislation, which dates to the Civil War, allows private citizens and groups to pursue legal action against companies and other entities for receiving payments from the government on false grounds.

In this case, the legal aid group is focusing on mortgages that were guaranteed by the Federal Housing Administration, which is part of the United States Department of Housing and Urban Development. When a borrower defaults on such mortgages, the agency makes payments to the bank to make it whole. Specifically, the legal aid group asserts that U.S. Bank made false claims to the government by collecting payments from the F.H.A. without also fulfilling the agency’s requirements that banks take certain steps to try to work with the borrower in default. Such “loss mitigation” measures are also intended to reduce the amounts that the F.H.A. has to pay.

The lawsuit recently suffered a setback when the Justice Department declined to join the legal action.

The F.H.A. backs about $1.2 trillion worth of loans, roughly 12 percent of total mortgages.

When asked whether Advocates for Basic Legal Equality could convincingly argue that a significant proportion of those claims did not meet F.H.A. requirements for dealing with borrowers, Andrew Neuhauser, a lawyer for the organization, said, “I’ve been representing homeowners in foreclosure for seven years and I’ve never seen a case when U.S. Bank complied with these regulations.”